The question of financial viability for an individual highway project presents some special dilemmas.[211] Attracting private investment requires the prospect of profit.[212] A key question in highway projects is whether revenues from tolls or other user fees will be sufficient to repay debt to bondholders and provide an attractive return on investors' equity.[213] A highway system is composed of individual roadway links.[214] Projects serving each individual link may or may not be able to generate revenues that cover facility costs and yield a return on investment, as required by the private sector, even though unmet highway needs are evident.[215]
Toll roads are the typical way the private sector recoups investments in highway projects. These roads also have a unique set of initial financial impediments to overcome. Although transportation project costs are subject to overruns, the revenues for toll roads are generally more difficult to project because they entail more uncertainties about human behavior-such as if enough motorists are willing to pay tolls to use the road-and because the revenue stream extends farther into the future and thus is subject to more unpredictable events that may affect the demand for the road.[216] Most toll-road projects proposed for public-private financing have been for new construction with no traffic patterns established for the facility.[217] Revenue forecasts rely exclusively on predictions of traffic; realize traffic levels vary with the pace of local and national economic growth and may be influenced by environmental restrictions and technological change.[218] These revenue forecasts for toll roads, although critical to the evaluation of whether to invest in a proposed project, have not been reliable and add to the uncertainty about the financial viability of public-private partnerships.[219]
In addition to forecasting revenue streams, there are other uncertainties concerning financial viability of toll roads. Other modes of transportation and new parallel roads may divert traffic and affect income streams.[220] Limits placed on revenue sources and pricing policies imposed by State or local government also will restrict the potential for profit and incentive for private investment.[221] Furthermore, other external factors, such as high fuel prices and air quality restrictions, may reduce toll road usage. These uncertainties make investors less willing to sponsor toll road projects.[222]
Furthermore, the U.S. highway network is an extensive, mature system built over a long time, yet relatively few miles in the network are high-volume, primary or Interstate-type routes.[223] New, financially feasible projects are most likely to be for high-capacity facilities.[224] While inadequacies exist, few obviously crucial highway links have been left unbuilt, narrowing the candidates for public-private partnership development.[225] Despite this fact, major opportunities remain within major metropolitan areas as existing high-capacity facilities get congested due to economic and demographic growth and resulting increases in travel demand. However, metropolitan area highway expansions are also extremely expensive to provide, due to the high costs for additional rights-of-way and freeway interchange modifications. Costs for supply of new road space are significant. Recent construction cost data suggest that average costs for providing additional peak period capacity on urban freeways amount to as much $10 million per lane mile, which equates to about 30 cents per mile driven on the added lane in peak periods. On the other hand, motorists pay only 2 cents in fuel taxes per mile driven, based on combined Federal and State fuel taxes amounting to 40 cents per gallon and fuel efficiency of 20 miles per gallon. [226]
Due to these high costs, private proposals cannot in most cases be self-financed using toll revenue alone, and need to get an infusion of tax support from the public sector. For example, the State of Maryland has found that the proposed Inter-County Connector (ICC) project in Montgomery County can recover a relatively small portion of its construction costs from tolls, and will need tax support for more than half of its costs. Similar assessments have been made for the "Express Toll Lanes" proposed to be built on several major highways in Maryland. Recently, the Virginia Department of Transportation determined that a private proposal to build high-occupancy toll (HOT) lanes on the Capital Beltway in Washington DC metropolitan area would require about $200 million in tax support for construction, and additional public funds would be needed for operation and maintenance.
Start-up financing problems represent a serious barrier to public-private partnerships because of the high risk involved in planning, developing, and constructing a highway partnership project.[227] The initial phases of a transportation project involve unique and significant risks that are difficult to estimate.[228] They include the time and cost to obtain environmental and other permits and the costs and uncertainties of land acquisition.[229] Further, after much time and money have been invested in a project, the State DOT may not approve a project.[230] Even if the project is approved, there is the risk of losing the intellectual property (i.e., the possibility that the State DOT will undertake a traditional development approach).[231]
Initial evaluation of a public-private partnership project is not the only uncertainty in assessing the financial viability of a project. Substantial risks are involved in the highway construction process. Large projects face possible unforeseen and uncontrollable design and engineering changes, which can undermine the financial viability of an otherwise sound project.[232] Completion delays alone can add substantially to completion costs and defer the receipt of user revenues.[233] These uncertain completion costs for a highway facility are a barrier because the construction phase spans several years and market conditions may change, labor and materials costs may increase, interest rates may fluctuate, and unexpected delays occur.[234] Construction cost overruns can consume a developer's capital budget and undermine the coverage of debt service.[235] Additionally, construction risks will be reflected in the higher yields required by investors.[236] The yields will not be known until financing is completed, raising further uncertainties about the overall costs of the project.[237]
Traditional public highway construction projects use funds allocated from State transportation budgets and request bids for project completion.[238] If the bids are within the budget, the project is likely to proceed; if not, it is deferred, redesigned, or rebid.[239] Public-private partnership projects normally seek financing for some portion of construction costs beyond the equity or public investment, yet these costs are relatively difficult to predict before contracting and thus pose a barrier.[240] The structure and marketability of these financing arrangements require reasonably precise and definite knowledge of project costs; thus, new approaches to control and allocate construction risks are necessary.[241]